When an employer breaches an employment agreement and an employee resigns in response, a critical question is raised: has the employee been constructively dismissed? If so, the employee is deemed to have been terminated and the employer may incur substantial liability for pay in lieu of notice or even punitive damages. However, not every breach of an employment agreement will constitute constructive dismissal, and the resolution of this issue can make all the difference in terms of employer liability.

In the recent decision in Chapman v. GPM Investment Management, 2017 ONCA 227, the Court of Appeal for Ontario upheld the trial decision of Justice Gunsolus finding that GPM had not constructively dismissed Mr. Chapman despite breaching his employment contract when it failed to pay him a bonus of approximately $330,000. In doing so, the Court of Appeal provided a helpful overview of the test for constructive dismissal, and why not every breach of the employment agreement by an employer will meet this test.

The Test for Constructive Dismissal

As noted by the Court of Appeal, the test for constructive dismissal was recently articulated by the Supreme Court of Canada in Potter v. New Brunswick Legal Aid Services Commission, 2015 SCC 10. Specifically, constructive dismissal can occur in one of two circumstances:

Where an employer has, by a single unilateral act, breached an essential term of the contract of employment; or

Where there has been a series of acts that, taken together, show that the employer no longer intended to be bound by the contract.

On both branches of the test, it is the employer’s perceived intention to no longer to be bound by the employment contract that gives rise to the constructive dismissal.

Further, in order to find a constructive dismissal has occurred under the first branch of the test, two elements must to be shown:

The employer’s conduct must be found to constitute a breach of the employment agreement; and

Where a breach is found to have occurred, the conduct must have substantially altered an essential term of the contract.

In Chapman, the plaintiff argued that, among other things, the trial judge erred by conflating the two branches of the Potter test. The Court of Appeal dismissed this argument and noted that the Court’s perspective properly shifts during the analysis. Specifically, when determining whether an employer’s conduct has amounted to a breach of contract (i.e., the first step of the first branch), the test is objective. This is in contrast to both the second step of the first branch and the second branch in its entirety, where the question before the Court is whether “a reasonable person in the employee’s situation would have concluded that the employer’s conduct evinced an intention to no longer be bound” by the employment contract.

In other words, an employee does not have to demonstrate that the employer actually intended to no longer be bound by the employment contract, but merely that a reasonable person in the employee’s shoes would have concluded that was the employer’s intention (and therefore excluding any evidence that was not within the employee’s knowledge).

The ultimate question in all cases is whether the employer has, by its conduct, evinced an intention not to be bound by the contract.

Application to the Case

While the issue of whether GPM breached the employment agreement when it excluded a portion of Mr. Chapman’s bonus was heavily disputed at trial, on appeal GPM conceded the breach had occurred. Specifically, the employment agreement entitled Mr. Chapman to a bonus of 10% of pre-tax profits less interest income and depreciation, yet when it came to calculate this amount, GPM improperly excluded profits from the sale of an investment property. The employment contract did not provide for this type of exclusion from pre-tax profits, and therefore the exclusion was held to constitute a breach of Mr. Chapman’s employment agreement.

However, the trial judge also made a number of key findings regarding the investment in question that directly impacted the constructive dismissal issue. Specifically, the trial judge held that it was a unique investment that had been acquired prior to Mr. Chapman’s employment with GPM, it was the only real estate investment held by GPM throughout Mr. Chapman’s employment, and that GPM had no intention of pursuing similar investments as it had concluded that such real estate investments put it in a conflict of interest with its investors. In short, the trial judge held that Mr. Chapman had no expectation of further bonuses from similar sales of property in the future.

The trial judge went on to hold that the dispute “amounted to a dispute over the interpretation of the application of one transaction to Mr. Chapman’s bonus scheme and nothing more.” As Mr. Chapman had conceded he had not been advised that there would be any changes to his duties, base salary, or method in which his bonuses would be calculated in the future, the trial judge held that GPM had not evinced an intention to no longer be bound by the employment agreement and that a reasonable person in Mr. Chapman’s position would not have considered himself to have been constructively dismissed when the bonus on the sale of this property was refused.

Interestingly, in response to Mr. Chapman’s argument that he had been put in the untenable position of having to either forego the $330,000 bonus and keep his job or sue GPM to recover the unpaid bonus, the Court of Appeal upheld the trial judge’s finding that there were other dispute resolution alternatives open to him including proposing arbitration and/or following up on GPM’s suggestion that it might reconsider paying something towards a bonus if other investors in the property agreed (despite having no obligation to do so).

Takeaways

The Court of Appeal’s decision in Chapman v. GPM provides some comfort to employers as it confirms that not every breach of contract will amount to a constructive dismissal. However, employers should keep in mind that the question is not simply whether the employer actually intended to remain bound by the terms of the employment agreement, but whether a reasonable person in the employee’s position would conclude that the employer no longer intended to remain bound. As such, the reality of the employer’s actual intentions may not be determinative if evidence of such was not available to the employee when he or she made the decision to resign.

In this case, the fact that the denial of the $330,000 bonus was in the context of a one-off transaction that would not be repeated in the future was a strong factor in the Court’s decision to find a constructive dismissal had not occurred. Had the Court found that GPM’s “interpretation” of the bonus terms would likely apply to bonus payments in the future, it is possible that a different result would have been reached.

Unilateral changes to employee compensation, particularly those that constitute breaches of employment agreements, are perhaps the most common circumstances where constructive dismissal claims can arise. As such, employers are well advised to carefully consider any potential changes to employee compensation and seek legal advice to minimize the risk of a constructive dismissal being found to have occurred.